www.moyesco.com Moyes & Co.

Dee Patterson

Moyes & Co

The LNG Industry: Redefined by North America

SPEE Houston Chapter MeetingFebruary 16, 2017

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Key Points

LNG is the fastest growing segment in the global energy business− Demand grows with supply− Increasing fungibility

Significant new capacity recently added in Australia− Not all new capacity sold at startup

Business transforming from “End User” buyer to “Trader” buyer

US Unconventional Resource Plays drive North America into the LNG Export Business

North America LNG Exports will be a disruptive to the Global LNG Industry

It Will be good for LNG Consumers

It Will be a threat for traditional LNG Producers

It Will be a good business for US LNG Producers

The LNG Offtake Owners have significant exposure

????? For North America Gas Producers

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LNG History and Outlook

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5% CAGR

7% CAGR

9% CAGR

Source: IGU, EIA, Moyes data

1 BCFD ~ 7 MMTPA

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Growing LNG Volumes Trading under Non Long Term Contracts

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Source: IGU Data

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Estimated Volume from Expiring LNG Contracts

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Estimated 17 BCFPD of Contracts to ExpireSource: IGU Data

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Japan LNG Prices vs HH Spot Prices

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Global Estimated Landed LNG Prices($/MMBTU)

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Source: FERC

Lake Charles2.66 / 3.34

Bahia Blanca15.05 / 8.20

Belgium8.49 / 5.58

Japan14.55 / 8.77China

14.15 / 8.62

Rio de Janeiro13.90 / 7.99

UK8.67 / 5.86 Korea

14.55 / 8.77

India14.15 / 8.64

Altamira3.17 / 7.94

Cove Point2.94 / 6.66 Spain

10.24 / 6.76

August 2012 / December 2016

Source: Waterborne Energy / FERC

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Of the 44 proposed terminals, only 5-8 need to be built to meet the LNG import Demand. Aligning with the right LNG Project and securing off-take is the key for these projects to move forward.

2 Terminals

3 Terminals

2 Terminals

1 Terminal

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Japan LNG Prices vs HH Spot Prices

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New LNG Capacity will rotate from Australia Centric to US Centric

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LNG Export Facilities Have a Global Reach

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Existing Facility

Under Construction

Kenai

Peru LNG

Atlantic LNG

Nigeria LNG

Angola LNG

EG LNG

Snohvit LNG

Arzew/Skikda Egypt/Damietta

Marsa El Brega

Yemen LNG

Oman LNG

ADGAS

Qatargas/Rasgas

Arun

Brunei

MLNG

Sakhalin

Bontang

Tangguh

PNGLNG

AUSPAC QCLNG Gladstone

NW Shelf

Pluto

Darwin

Gorgon

Freeport, Cameron, Sabine Pass, CCLNG

Cove Point

Yamal

WheatstonePreludeIchthys

MLNG Train 9

Likely Proposed

Mozambique

Magnolia Golden Pass

Southern LNG

Donggi

PNG LNG 2014 6.9 19.0QCLNG 2015 8.5 23.7Gorgon T1/T2 2016 10.4 54.0AusPac LNG 2016 9.0 24.7Gladstone 2016 7.8 21.6Sabine Pass T1/T2 2016 9 22.5

Capacity (MMTPA)

Year Total Project Cost ($BN)

Recently Completed Projects

Project

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Sabine Pass LNG Re-Purpose LNG Import Terminal Reduces Cost

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Cheniere Website

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LNG Plant Costs

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Source: WoodMac

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US LNG Export Projects

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65 MMTPA of capacity being constructed for export− 59 MMTPA (8.5 BCFD) has been contracted via takeoff agreements− Additional ~34 MMTPA (4.8 BCFD) approved by FERC not currently under construction− Pending applications account for additional ~70 MMTPA (10 BCFD) of export volumes

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US Liquefaction Projects

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Existing Facility

Under Construction

Signed Offtake

Corpus Christi LNG2 Trains 9 MMTPA

$8.4BOfftake: Pertamina, Endesa,

Iberdrola, GNF, Woodside, EDF

Sabine Pass 5 Trains 22.5 MMTPA

$15.6BOfftake: BG, GNF, KOGAS,

GAIL, TOTAL, Centrica

Freeport LNG3 Trains 13.9 MMTPA

$14BOfftake: Toshiba, SK

E&S, BP, Osaka

Magnolia LNG (Lake Charles)4 Trains 8 MMTPA

$4.4BOfftake: Meridian (UK), GNF,

LNG Holdings, AES LA, Brightshore

Cameron LNG3 Trains 12 MMTPA

$10BOfftake: GDF Suez, Mitsubishi, Sempra

Southern LNG1 Train 2.5 MMTPA

$1.5BOfftake: Shell

Cove Point1 Train 5.25 MMTPA

$3.8BOfftake: Sumitomo,

GAIL

Golden Pass LNG3 Trains 15.6 MMTPA

$10BOfftake: Exxon (South

Hook UK), Qatar

End users account for only 1/3 of

contracted U.S. volumes currently under construction

www.moyesco.com 16Source: DOE

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US Natural Gas Supply & Demand

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2016 EIA Annual Energy OutlookReference Case

Production

Consumption Estimated surplus of 10 BCFD by 2020 (Net Exports)

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Sabine Pass Economics

1-7 Year gas supply agreements averaging $-0.10 discount to Henry Hub− Supply contracts currently cover about 50% of required supply for trains 1-4

LNG sold to customer at 115% of Henry Hub price

Customers provide annual fixed fees ranging from $274MM - $723MM ($2.78/MMBTU Avg)

LNG supply contracts are for 20 years (“Take or Pay”)

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LNG Plant Tolling Fees needed to earn a 10% Pre-Tax IROR

Cheniere appears to be structuring fixed capacity fees to receive 10% pre tax ROR on liquefaction capital

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*Only considers estimated liquefaction capital for Australian projects

Project MMTPA $/MMBTU Fixed FeeMagnolia 8.0 2.50

Sabine Pass 22.5 2.78Cove Point 5.25 2.90Cameron 12.0 3.34Freeport 13.9 4.04QC LNG 8.5 4.41

Gladstone 7.8 4.81AUSPAC 9.0 5.51Ichthys 8.9 5.86Gorgon 15.6 7.31

Estimated 10% ROR Fixed Fees for Various Projects (Based on 90% Utilization)

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Australian LNG Project EconomicsFull Cycle, After Tax, Pre Transportation, LNG Only

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*Liquids not considered in analysis

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Global Natural Gas Prices

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Source: IMF, EIA

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Estimated LNG Shipping Costs ($/MMBTU)

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Source: Moyes & Co. Estimates

East Africa

USGC

Australia

Basic Assumptions (Jan. 2017):$50/BBL Fuel Costs155,000 m3 ship capacity$40,000/day charter rateIncludes boiloff, maintenance etc

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HH LNG delivered to Europe vs Europe Prices

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Assumes $1.25/MMBTU for transportation, regas etc.

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HH LNG Delivered to Japan vs Japan LNG Prices

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Assumes $2.25/MMBTU for transportation, regas etc.

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LNG Competitiveness against Futures Pricing

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Europe Gas Futures Strip is +/- $2.00 Less than HH LNG to Europe Futures Strip

At present, US cargoes should target Asian markets (Buyers?)

Marginal Cost is Less $2.78 Fixed Capacity Charge

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European Natural Gas Snapshot

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Source: European Commission Quarterly Report on European Markets (1Q2016)

• 2015 Production: 11.4 BCFD• 2015 Net Imports: 27.1 BCFD• 2015 Consumption: 38.5 BCFD

• Russia/Norway account for approximately 75% of EU imports in 2015 or 20 BCFD

• Security and pricing worries, particularly regarding reliance on Russian imports

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U.S. to Europe LNG PricingAssuming $3.00/MMBTU HH Gas, Sabine Pass Pricing/Fee Structure

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Plant Outlet Gas Price: $6.23/MMBTU

USLNG

Plant Outlet Gas Price: $3.00/MMBTU

Offtaker “Takes”

Offtaker “Pays”

At $3.00/MMBTU HH gas, Cheniere can theoretically deliver LNG into Europe for as low as ~$4.25/MMBTU as a result of the take or pay style contracts. Is this situation likely to happen?

Delivered Price: $7.48/MMBTU

Delivered Price: $4.25/MMBTU

Assumes $1.25/MMBTU for transportation, regas etc.Price at Plant Outlet Differential to HH($/MMBTU) ($/MMBTU)

2.00 5.08 6.33 4.333.00 6.23 7.48 4.484.00 7.38 8.63 4.635.00 8.53 9.78 4.786.00 9.68 10.93 4.937.00 10.83 12.08 5.088.00 11.98 13.23 5.23

Henry Hub Price ($/MMBTU)

Delivered EU Price ($/MMBTU)

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U.S. LNG Export Snapshot

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Sabine PassCameronFreeport

Cove PointCC LNG

Southern (Elba)

~8.5 BCFD

0.9 BCFD(0 BCFD)

Contracted Volumes

Spare capacity at 100% utilization(90% utilization)

US LNG volumes are tied up in long-term “take or pay” style contracts with little to no spare capacity available for dedicated short-term or spot deliveries

65% of contracted volumes taken by marketers, not end users

Some purchasers such as BP, Woodside and Shell have significant investments in other LNG ventures

Gas going to Europe is being marketed by these buyers who are paying the contracted prices for these volumes

Spot Markets, Short Term Contracts

End Users MarketersBG Group x 0.8

Gas Natural Fenosa x 0.7Kogas x 0.5

GAIL Limited x 0.9Total x 0.3

Centrica x 0.3GDF Suez (Engie) x 0.6

Mitsubishi/Mitsui x 0.6Sempra x 0.4Toshiba x 0.3SK E&S x 0.3

BP x 0.6Osaka Gas x 0.3

Chubu Electric x 0.3Pacific Summit (Sumitomo) x 0.3

Pertamina x 0.2Endesa x 0.3

Iberdrola x 0.1Woodside x 0.1

Shell x 0.3EDF x 0.1

Totals 7 13 3.0 5.6

US LNG Contract Buyers

Company End User Marketer Volume (BCFD)

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European Market with U.S. LNG Exports

Significant price and market share disruptions not foreseen as a result of US LNG

Threat of US LNG imports may help stabilize prices, setting a soft floor/ceiling− Lithuania and Poland use construction of LNG regas facilities as leverage in price negotiations with Russia

Offtakers unlikely to forego contracted volumes unless Asian and EU prices drop and remain very low− Russian oil linked gas contracts− Low coal prices

Upcoming US projects have minimal spare capacity available for dedicated spot and short-term cargoes

South American markets currently more attractive for U.S. spot cargoes that do become available− Estimated Landed LNG prices currently $1.00 – 1.50/MMBTU more in South America

Decreased demand in Asia may free up more cargoes that could find their way to Europe

European regasification and pipeline infrastructure not well distributed, hard to access Eastern Europe with U.S. volumes

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Conclusions LNG is now a global commodity business with changing dynamics

− LNG Demand is expected to grow at 9%/yr for next several years− Increasing fungibility of LNG− Increased short term contracts

Major LNG Markets:− Asia- Provide basic fuel for power generation and heating.− Europe- Alternative to Russian Gas− South America- Back-up gas supply

New LNG projects in Australia suffered from major cost overruns resulting in high cost supply.− Projects may face financial impairments (e.g. Gladstone)− Significant uncontracted volumes

North America will become a major force in the LNG Industry− Offtake volumes secured from Credit Worthy Buyers− Will quickly become No.3 supplier?− Delay or Mothballing of “New Projects”

North America LNG will disrupt traditional price indexing basis

North America LNG will harmonize LNG pricing for new global contracts

Offtake Contractors carry significant risk− Traders cannot force high cost gas to consumers − Higher cost than alternative supplies at Futures Based Pricing

Will it have an impact on North America Natural Gas Prices?

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Sabine Pass

First of new U.S. projects to come online

27 MMTPA eventual nameplate capacity, 6 Trains

Plant received first gas in late 2015

First LNG cargo 1Q 2016

Train 2 now operational

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Sabine Pass 2016 Cargoes

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US LNG Into Europe – What They’re Saying

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“It’s the start of the price war between US LNG and pipeline gas,” said Thierry Bros, an analyst at Société Générale, quoted by the WSJ.

“U.S. LNG supply to Europe may have strong geopolitical symbolism, but its current volume impact will be negligible, until the big volumes come on stream in 2018-19, and cargoes will probably go to higher value markets in Latin America and elsewhere,” Jonathan Stern, chairman and founder of the natural gas research program at the Oxford Institute for Energy Studies, said by e-mail.

“LNG coming out of the U.S. is probably the single most important thing that will transform the future LNG market,” Melissa Stark, energy managing director and global LNG lead at Accenture, said by e-mail. “It heralds the arrival of a global market.”

Wood Mackenzie said in a report in March that Russia’s export strategy has a major influence, however, prices of other commodities like oil and coal are more likely to have a stronger effect on US LNG exports. Coal prices could have the most impact since it “will determine European spot prices through coal-gas switching in the power sector.”

The LNG Industry: Redefined by North America��SPEE Houston Chapter Meeting�February 16, 2017Key PointsLNG History and OutlookGrowing LNG Volumes Trading under Non Long Term ContractsEstimated Volume from Expiring LNG ContractsJapan LNG Prices vs HH Spot PricesGlobal Estimated Landed LNG Prices�($/MMBTU)Of the 44 proposed terminals, only 5-8 need to be built to meet the LNG import Demand. Aligning with the right LNG Project and securing off-take is the key for these projects to move forward.Japan LNG Prices vs HH Spot PricesNew LNG Capacity will rotate from Australia Centric to US CentricLNG Export Facilities Have a Global ReachSabine Pass LNG Re-Purpose LNG Import Terminal Reduces CostLNG Plant CostsUS LNG Export ProjectsUS Liquefaction ProjectsSlide Number 16US Natural Gas Supply & DemandSabine Pass EconomicsLNG Plant Tolling Fees needed to earn a 10% Pre-Tax IRORAustralian LNG Project Economics�Full Cycle, After Tax, Pre Transportation, LNG OnlyGlobal Natural Gas PricesEstimated LNG Shipping Costs �($/MMBTU)HH LNG delivered to Europe vs Europe PricesHH LNG Delivered to Japan vs Japan LNG PricesLNG Competitiveness against Futures PricingEuropean Natural Gas SnapshotU.S. to Europe LNG Pricing�Assuming $3.00/MMBTU HH Gas, Sabine Pass Pricing/Fee StructureU.S. LNG Export SnapshotEuropean Market with U.S. LNG ExportsConclusionsSabine PassSabine Pass 2016 CargoesUS LNG Into Europe – What They’re Saying